The Finance Minister has this morning announced new rules allowing the Government headroom to borrow – and says he hopes to make ‘a real dent’ in a $100 billion infrastructure deficit

Grant Robertson has announced a two percent cap on surpluses to reassure banks and financial markets as he creates leeway to borrow for some serious infrastructure spending. He’s calling it “the new normal”.

At a breakfast speech at Rabobank in Wellington this morning, he announced the zero to two percent of GDP band for surpluses, to ensure new day-to-day spending doesn’t add to the debt incurred for in capital spending. That is intended to bring the operating balance before gains and losses (OBEGAL) back to surplus and then to maintain small surpluses on average over time.

The Treasury has recommended the Government maintain that average surplus within the two percentage point band over a 10-year period, subject to economic and fiscal conditions. That allows trade-off providing the flexibility needed to manage cyclical fluctuations and shocks, while not being so wide as to provide a lack of clarity about the Government’s intentions. 

In other words, governments should save – or run fiscal surpluses – during the upswing of economic cycles, to allow them to run deficits in downswings. “This approach is largely driven by a view that governments should aim for surpluses to offset future expected shocks, at which point deficits would be expected,” the Treasury advises. “If there were a significant economic shock, we would expect the average OBEGAL position to fall outside this range over a 10-year period.

“There are always possibilities of forecast adjustments and forecast errors – both in terms of upside and downside surprises – but we consider that aiming for a small operating surplus is a good starting point.”

At the same time, Robertson is changing the way the Government measures its debt, which he told business leaders would bring New Zealand more closely in line with other countries. He sees the debt lid and cap on surpluses as complementary, avoiding the criticisms targeted at previous government of running up big surpluses – money that could have been better left in the economy.

A new debt ceiling would ensure New Zealand maintained some of the lowest government debt in the world, he claimed, while still allowing greater room to invest in infrastructure.

“While this rule gives us a comparably low level of net debt, it will provide fiscal space to fund high quality capital investments that improve productivity and wellbeing.”

The new measure looked at multi-year averages, allowing debt to be run up to a peak in the event of a one in 100 year shock. “That would see debt spiking significantly higher than the ceiling.”

He said the Infrastructure Commission had made it clear, in a report yesterday, “that New Zealand has a gaping infrastructure deficit.” He expressed the hope that New Zealand could have “a mature conversation” about public debt, to pay for infrastructure.

A Te Waihanga Infrastructure Commission report showed that it would cost $31 billion a year, roughly a tenth of New Zealand’s GDP, to plug the infrastructure deficit and build for the future. Fixing the Three Waters infrastructure alone is forecast to cost $185 billion over the next 30 years – though the Government has refused to commit to any further taxpayer investment there, relying on borrowing by the four big council-owned water corporations.

“Every one of us knows what that looks and feels like in real life. It’s the hours of productivity lost stuck in Auckland’s traffic. It’s the burst water pipes here in the capital. It’s the run down hospitals in the provinces.”
– Grant Robertson, Finance Minister

Robertson made clear yesterday that New Zealand couldn’t afford to just build its way out from that shortfall, and needed to think about what could be done to better use what infrastructure already existed. He said he did not intend to change the debt track over the next few years, but governments might need to borrow more in a longer timeframe.

Today, he said one estimate fed into that report was that New Zealand was sitting on an infrastructure deficit of $104 billion.

“Every one of us knows what that looks and feels like in real life. It’s the hours of productivity lost stuck in Auckland’s traffic. It’s the burst water pipes here in the capital. It’s the run down hospitals in the provinces.

“For decades as a country we have failed to make the investments that we need to drive productivity and improve wellbeing.

“New Zealand’s population grew from three million to four million across 30 years from 1973 until 2003. We then grew from 4 million to 5 million in just on half of that time. But we did not build the houses or the public transport networks or public services we needed to match up with that.

“I am not prepared for our country to be on the back foot any longer when it comes to infrastructure. Our investments using the fiscal headroom created by this fiscal rule will need to be high quality, well thought through and have a clear and direct benefit to our productivity and wellbeing.”

Robertson said the interaction of the two fiscal rules – the debt cap and the surplus cap – meant that additional debt couldn’t be used for day-to-day spending. That left the debt ceiling to guide capital investments.

Under the old measure, the Treasury recommended the ceiling be 50 percent of GDP. Robertson said the new measure – a 30 percent debt ceiling – was effectively the same as the old one, but the numbers were counted in a manner more akin to other countries.

The International Monetary Fund forecasts that New Zealand’s 2021 net debt, at 15 percent of GDP, will grow to 21.3 percent in 2023, before slowly easing back to 16.4 percent in 2027.

By that measure, New Zealand’s debt will be lower in every out-year than bigger industrialised nations like Australia, Canada, the UK and the USA.

“The Government was able to use our strong strong financial position to support New Zealanders through Covid with programmes like the wage subsidy scheme. As we move to a new normal post the peak of Covid it is the right time to resume a set of fiscal rules to carefully manage costs while planning for the future,” he told his audience.

Newsroom Pro managing editor Jonathan Milne covers business, politics and the economy.

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